GDP disappoints
The intensifying load shedding we saw has severely impacted the growth numbers. The economy shrank by 1.3% q-on-q versus the 1.8% growth in Q3. Loadshedding continued and probably intensified in Q1 of this year, so the prospects for Q1 of 2023 are not looking rosy. If we have another negative quarter of growth, the South African economy will find itself in recession. The economy is limping along and is now back at GDP levels pre the Covid pandemic.
Rand under pressure
The rand is under pressure for the day, mostly due to the economy's poor performance and partly because of a stronger dollar. The rand is still a big underperformer this year, and the market will wait for Fed Chair Powell's testimony which starts later. Just how hawkish he will talk needs to be seen, as the market is already aggressively pricing in more interest rate hikes. The 2Y yield in the US has risen by nearly 90bps since 1 Feb this year, so will the rally continue is the question. For now, it looks like the rand is heading towards the R18.52 again, which is the 2023 year high versus the dollar.
Powell hinting at even higher US interest rates
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require we maintain a restrictive stance of monetary policy for some time.”
The dollar is ripping through the market, and treasury yields across the board are jumping. 2Y yields is pushing 5% and 10Y yields almost at 4%. US equity markets are under pressure losing close to 1% so far on the day. US swap rates are now fully pricing a 50bps hike at the 22 March FOMC. USDZAR is now back testing the 2023 high of R18.53. It could be a slippery slope if this level breaks.
